Posted by & filed under Daily Intelligence Briefing, Technology.

Daily Intelligence Briefing

Wednesday, July 20, 2022

Identifying Change-Driven Investment Themes

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

Data Center Construction Continues Apace, But Some See REITs Threatened by Public Cloud Partners

Summary: Despite a drawdown in the share prices of data center REITs, spending on facilities is booming this year. Several key REITs are now in the process of spending millions to expand their footprints. Cloud computing continues to be a major growth engine for the data center business.

However, not everyone sees rising demand for cloud computing as a positive for data center REITs. Famed short seller Jim Chanos has announced a large short position against these firms, claiming that dependence on public cloud providers will one day lead to the cannibalization of their margins. Since cloud giants like Amazon, Microsoft, and Google are in the process of building out their own data center infrastructure, the need for colocation services provided by third party data centers, and therefore the rates they’re willing to pay, may be diminished. 

Related ETF, REITs: First Trust Cloud Computing ETF (SKYY), Digital Realty Trust, Inc. (DLR), Equinix, Inc. (EQIX), Iron Mountain Incorporated (IRM)

McAlinden Research Partners is offering a complimentary 60 day subscription to receive the full Daily Intelligence Briefing to Hedge Connection clients/friends.

Activate your Free Trial now

Data Center Spending Remains Robust, REITs Expand Footprint

International Data Corporation (IDC) predicted last year that global data creation and replication will enjoy a compound annual growth rate of 23% over the 2020-2025 period. That’s good news for data-center real estate investment trusts (REITs), which are now so expansive, they account for 1.8% of all electricity use in the US.

Through the first quarter of 2022, data center construction has boomed, according to Dodge data. Starts reached $1.4 billion during the first three months of 2022, a 29.2% increase from the first quarter of 2021.

Further research from Dell’Oro Group substantiates this conclusion. Per their data, the major hyperscalers (owners and operators of data centers where these horizontally linked servers are housed) and cloud providers are forecast to spend 25% more on datacenter infrastructure this year, totaling $18 billion, following record investments in the opening three months of 2022. The Register notes the top four cloud providers will expand their services to as many as 30 new regions this year.

As ConstructionDive Reports, QTS, an Overland Park, Kansas-based REIT focused on data centers, is leading a huge expansion, recently announcing a 1.5 million-square-foot expansion to its already existing 1.4 million-square-foot data center next door in in Henrico County, Virginia. Elsewhere in VA, Potomac Local News reports that information management firm and REIT Iron Mountain plans to spend $6 million on their own data center expansion.

At the end of 2021, MRP noted Oracle went all in on expanding their cloud ambitions, announcing a blockbuster acquisition of electronic-medical-records company Cerner Corp. Per the Wall Street Journal, Oracle paid roughly $28.3 billion for their all-cash purchase – its largest deal ever. Just last week, Reuters reported that Oracle had announced the opened its first cloud region in the Nordics in Stockholm, along with one in Milan, Italy. Those additions expand the firm’s data center presence to a total of 36 regions worldwide.

Oracle does not build out its own data centers, however, marking an interesting difference between itself and the so-called “Big Three” in cloud computing; Amazon Web Services (AWS), Microsoft Azure, and Google Cloud. Instead of maintaining its own cloud data center infrastructure, Oracle depends on colocation facilities to host its own public cloud. Colocation describes the use of data center facilities built for servers and other computing hardware that can be rented to retail customers – often described as a “carrier hotel”.

Chanos Shorts Data Centers, Claims Public Cloud Cannibalizes Colocation

Colocation is critical to the business model of data center REITs, which has recently made them the target of well-known short seller Jim Chanos, President and founder of Kynikos Associates. Chanos made his name correctly identifying the coming collapse of Enron in 2001 and has now announced he is working to raise hundreds of millions of dollars for a fund that would bet against datacenter REITs listed in the US based on his belief that colocation data centers will lose out to large public cloud providers.

The aforementioned “Big Three” are leaders in the public cloud space, which offers computing services from third-party providers over the public Internet, making them available to anyone who wants to use or purchase them. They may be free or sold on-demand, allowing customers to pay only per usage for the CPU cycles, storage, or bandwidth they consume. Though many public cloud providers own their own data centers, they remain some of the biggest customers of colocation data centers.

Chanos says this is exactly why the public cloud industry is such a threat to colocation:

“The real problem for data center REITs is technical obsolescence… Their three biggest customers are becoming their biggest competitors. And when your biggest competitors are three of the most vicious competitors in the world, then you have a problem.”

Essentially, Chanos views the data center REIT and colocation business becoming too reliant on their public cloud customers that are actively expanding their own data centers to bolster their business. Chanos argues that although hyperscalers use data center REITs to supplement their own build-out, as they grow more powerful, the margins they will offer will shrink. This could one day lead to the public cloud no longer needing other data centers at all and dumping them as partners.

Industry analysts like Gartner expect growth in total spending on cloud deployed solutions to top 20% in 2022, totaling $494.7 billion, up from $410.9 billion in 2021.

Bill Stein, CEO of data center REIT Digital Realty, has pushed back on Chanos’s claims. Stein asserts their relationship with the public cloud providers is that of “partners”, and further, “they view us as partners”. As Data Center Dynamics reports, analysts from Jefferies, Wells Fargo, and DBS Group have responded to Chanos’s short in a similar fashion, largely making the case for continued strength in data center REITs.

DBS Group, in particular, notes that while major cloud providers will continue to move into their own facilities, they must also “seek new capacity to keep up with their customer growth. We understand that they are still struggling to fulfill their own demand and capacity.” As S&P Global notes, companies now prefer to leverage hybrid infrastructure, with assets in the public cloud and hosted in both company-owned datacenters and third-party colocation facilities.

For Investors

Investors can gain broad exposure to cloud computing via the First Trust Cloud Computing ETF (SKYY). For exposure to data centers, REITs like Equinix, Inc. (EQIX) and Digital Realty Trust, Inc. (DLR) may be viable options.


There is much more to this report! McAlinden Research Partners is offering a complimentary 60 day subscription to receive the full Daily Intelligence Briefing to Hedge Connection clients/friends.

Activate yours by signing up today

Leave a Reply

Your email address will not be published. Required fields are marked *